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Systemic risk of portfolio diversification

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  • Maehashi, Kohei

Abstract

This paper studies the vulnerability arising from the corporate loan holdings of collateralized loan obligations (CLOs) using a network reconstruction method and stress tests. Because of the portfolio diversification requirement imposed on the management of CLOs, some corporate loans are held by multiple CLOs. This commonality of corporate loans among CLO portfolios suggests the possibility that the diversification of risk in each CLO is not as high as it may appear from the perspective of the entire market. Stress tests show that portfolio diversification of securitization as observed in the CLO loan holdings is not necessarily effective in enhancing system-wide robustness against the idiosyncratic defaults of the underlying assets.

Suggested Citation

  • Maehashi, Kohei, 2021. "Systemic risk of portfolio diversification," Economics Letters, Elsevier, vol. 208(C).
    • Handle: RePEc:eee:ecolet:v:208:y:2021:i:c:s0165176521003682
    DOI: 10.1016/j.econlet.2021.110091
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    References listed on IDEAS

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    More about this item

    Keywords

    Systemic risk; Bipartite network; Network reconstruction; Stress test;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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